Emerging Markets by Lyonsdown

Business Reporter scoops top prize at prestigious industry awards | Full story page 6

March 2014 | business-reporter.co.uk

EMERGING MARKETS

Keeping British business competitive in a global economy

Pages 8-9

Dave Baxter reports from Brazil ahead of this yearâ&#x20AC;&#x2122;s World Cup on a country that is finding its place on the international stage | Pages 4-5

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Exclusive interview with shadow business secretary Chuka Umunna

Business Reporter · March 2014

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Emerging markets

Opening shots René Carayol

E L I V E in Volatile, Unpredictable, Complex and Ambiguous times – or VUCA. The Americans coined the term, but it could not be more apt for the raucous but still upwards march of the emerging markets. In recent weeks we have seen the devastating scenes in Kiev – yet another emerging market in crisis and seemingly approaching meltdown. Similar disturbing pictures have come out of Bangkok and Istanbul. Just a few months ago it appeared that Ukraine, Thailand and Turkey were getting their acts together, especially in the case of Turkey, hailed by many as the model for the post-BRICS developing nations. This unrest has added to the alarming recent run on emerging markets, which has shattered confidence. Investors are rattled and are reassessing their thinking. This stalling of developing economies should not come as a huge surprise as they have always been a rollercoaster ride, but even the most decrepit situations have eventually turned around. In 1950, just 15 per cent of the world’s population lived in developed economies. In the intervening years, the transforming benefits of industrialisation and trade has led to rapid

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This is no time to lack courage or faith in the ability of the emerging markets economic growth, and has touched all parts of the developing world, from Asia to Latin America and now Africa. This pace of change will not stop now. My guess is we’ll probably see nearly three quarters of the world’s population thriving in developed economies by the end of this century. Recent history has seen crises as bad as we are experiencing today. The shockwaves of the protests and tragic massacre in Beijing’s Tiananmen Square in 1989 looked incurable for China. Despite the opprobrium and political turmoil, the Chinese economy doubled in size within ten years, and doubled again over the next decade. The disintegration of the Russian economy in 1998 required intervention from the IMF – but it rebounded before hitting turbulent waters again ten years later. In 1997, it was South Korea, which again was a model emerging market, that nearly

Follow us on twitter: @biznessreporter crashed along with Thailand and Indonesia, all requiring bailing out by the IMF. But they have bounced back, and how? In the last 40 years the developing nations have continued their upward trajectory, no matter how bad the setbacks or how deep the political unrest. We must remember that they are developing nations. This means they still, broadly, enjoy lower labour costs, rising productivity, and “leapf rog ” improvements in t heir com mun icat ions a nd t ra nspor t infrastructures that will only get better. When this is coupled with better education and a burgeoning middle class, this has hugely changed the lives of workers, and business people right across the developed world – and that appetite and ambition will continue to fuel growth. While many enjoy the benefits of the huge acceleration of these markets, the establishment of proper and robust institutions that provide necessary governance, oversight and regulation usually lag dangerously behind. No matter how positive the economy looks, without a strong and fully functioning government they will inevitably malfunction. Ukraine, Thailand and Turkey are live examples of the implications of immature and fledgling governments. As the focus shifts towards Africa, the history of the developed nations informs us to expect even more VUCA. Given the volatility of global markets, we should not expect calm and consistency, however, this is not a moment to lack courage or faith in the ability of the emerging markets to overcome these VUCA times.

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Struggle heats up for BRIC smartphone industry By Dave Baxter WITH much of the western market sewn up by the biggest names, phone manufacturers are preparing to scrap it out over the emerging markets as they look for growth. With wealth increasing in developing nations, global giants including Apple and Samsung are fighting local manufacturers – and each other – over a middle class looking for affordable smartphones. Other big names have been busy already gearing up for the fight. Last month Mozilla, the company behind the Firefox web browser, unveiled a $25 smartphone aimed at moving into markets where prices need to be low. The same week saw the launch of the Nokia X phone, which will cost €89. China, India, Brazil and Africa in particular offer rich pickings because of their growing wealth and huge populations. But tapping into this will not be easy. New entrants are likely to run into fierce competition in markets where the race has already begun, particularly among local companies. Dominic Sunnebo, global insight director at research group Kantar Worldpanel, says: “What we are seeing at the moment, particularly in China, is that local brands are doing incredibly well. “In China you have names such as Huawei, Lenovo and Xiaomi. At the moment they are winning the battle with the global players, because people in developing markets tend to care less about brands. “If you look at Africa and India and Brazil, that’s where some brands like Nokia are incredibly strong. “With these guys, when they buy it’s about trust. They don’t have huge amounts of money

An emergent middle class means phones are big business in China; inset: Firefox’s new $25 handset

to spend. They just want the best. These are not particularly high-spec devices.” Devices are unsophisticated compared with the latest tablets and phones in the UK – often equipped with message and call functions, as well as basic apps and internet capabilities. But they are changing people’s lives by giving them internet access. Sunnebo says: “In China, tablet ownership is quite low. In the UK we’re not far from 50 per cent, but in China it is around 15 per cent. People are buying phones to get online – they want to get

connected. These phones have limited internet browsing and limited apps and instant messaging. But if you can get that [internet access], you can branch out into social media. “With games, if you are talking the likes of Flappy Bird, that would be fine. But games with high graphic content won’t work on these phones.” Diana Jovin, vice president for corporate development and com municat ions at Spreadtrum, a chipmaker which has teamed up with Mozilla on its $25 phone, says: “It places the web in the hands of people who didn’t have it today. “It could be not just t hei r f i r st smartphone, but their first smart device. Now they expect access to the internet.”

The rise of low-end phone present s a di lem ma for companies such as Apple, which have succeeded in the west by producing sophisticated devices which are expensive but fashionable. Sunnebo says: “What we see in developed markets is, when people switch to a smartphone, they buy at the lower end, because they can’t picture how good this device will be to them. “After that, they might be prepared to spend more. But in the developing markets, even if people want to buy a higherend phone, they won’t be able to afford that. “That’s a problem for the big boys like Samsung and Apple. Their products are linked to their brands.” At the same time, Jovin believes the phones are likely to become more powerful and sophisticated without prices rising. She says: “There are more features that the phones have

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in the same price range as before. So if you bought a smartphone for $150 two years ago, you will get a lot more today for that price point.” These emerging markets a re fa st becom i ng t hey key battlegrounds for the smartphone industry. The outcome is far from set.

Top banana: Fyffes and Chiquita to merge PLANS for a “transformative” merger could create the world’s largest banana firm. Dublin-based Fyffes and American Chiquita have announced a planned merger worth around $1billion. The new company, ChiquitaFyffes, would employ around 32,000 workers across the globe and operate in more than 70 countries, including Central America, South America and Asia. The firm would have annual revenues of approximately $4.6billion. A Chiquita release announcing the plans notes an ambition to expand in key production areas, reading: “With more than 24,000 hectares of owned or leased operations in Central America, the combined company is expected to be able to more efficiently manage its sourcing portfolio.” Fyffes executive chairman David McCann said: “This deal will be transformative and offer exciting opportunities for the new business. We believe we will be able to use our joint expertise, complementary assets and geographic coverage to develop a business that can run smoothly and efficiently to better partner with our customers and suppliers.”

Business Reporter · March 2014

Emerging markets

Dave Baxter reports on his recent visit to Brazil

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Brazilian spirit will always find a way They try to find a way around things. It’s in the genetics of the country. To compare it to their football, they are looking at where the goal is and how to get to it

brazil

in numbers • Estimated population of 198.7 million • Total area of 3,287,956 miles, making it the world’s fifth-largest country • As of 2011, life expectancy at birth was 73 • For the period 1900-2009, the average temperature in December is 25.4°C • GDP in 2012 was $2.253trillion

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Clockwise from top left: São Paulo, Brazil’s financial engine room; the carnival in Rio; football legend Pelé at the 1970 World Cup; poverty and lack of infrastructure is still a real problem

Business Reporter · March 2014

Emerging markets

Business Reporter · March 2014

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Emerging markets

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Best in the business! Business Reporter takes top prize in journalism awards

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HE EXCELLENCE and professionalism of our journalism has been recognised by the Institute of Risk Management, who awarded Business Reporter its prestigious Risk Management Journalism of the Year prize at the Global Risk Awards 2014 last month. Business Reporter was nominated for the award for its special report on Risk Management, distributed with The Sunday Telegraph in September 2013. Our winning entry included articles on how businesses can best deal with the impact of bad weather, an interview with security specialist and former soldier Andy McNab, a look at online reputational risk, and a piece by Business Reporter’s

Top team: (l-r) Daniel Evans, editor; Alexis Trinh, client manager; Matt Smith, web editor; Dave Baxter, senior reporter; Dan Geary, production editor; Joanne Frearson, reporter

authoritative columnist Rene Carayol (inset) on why companies should not be excessively risk-adverse during a downturn. T he judge s pra i sed Business Reporter on its accessible style, explaining risk-related issues in a way that those outside the risk management industry can enjoy. “It’s a really great feeling,” said senior reporter Dave Baxter, who worked on the issue. “It was good to hear that we were recognised for accessibility. Risk management can be a complicated theme but it’s an increasingly important area and it’s important to communicate with businesses.” Baxter attended the awards ceremony at

The Grand Connaught Rooms in central London, where he collected the trophy, presented by Mana Communications managing director Caleb Hulme-Moir, alongside web editor Matt Smith. “The moment when we realised that we had won was really quite a shock,” Baxter continued. “We were up against a number of trade publications who cover the sector more regularly than we do and are more embedded in that particular world, so I didn’t think we would end up winning.” Business Reporter editor Daniel Evans added: “This award reflects all the hard work the staff have put in over the last few years. I’m particularly pleased that the judges highlighted our accessible style and I hope we continue to address niche business areas in a way that can interest and engage non-experts. Hopefully this award will be the first of many.”

How Turkey’s government is looking after businesses entering the country INDUSTRY VIEW

n order to provide foreign investors with better services, back in 2006 Turkey established the Investment Support and Promotion Agency of Turkey (ISPAT), which is directly attached to the Prime Minister. ISPAT provides investors with assistance before, during and after their entry into Turkey. It serves as a reference point for international investors and as a point of contact for all institutions engaged in promoting and attracting investments at national, regional and local levels. In order to promote the investment environment and opportunities in Turkey, ISPAT held 52 visits to 30 foreign countries in 2011, 95 visits to 38 countries in 2012, and 101 visits to 39 countries in 2013. Between 2011 and 2013, ISPAT prioritised investments in the energy and manufacturing sectors. With its extensive range of promotion

activities, ISPAT is aiming to attract hightechnology investments and encourage investments for products not yet produced in Turkey. As a result of efforts given to improve and promote Turkey’s investment climate, as well as its favourable incentives, the country attracted more than US$135billion of FDI between 2003 and 2013, whereas it received only US$15billion in the preceding eight decades between 1923 and 2002. Similarly, the average annual FDI Turkey received during the 1990s was only US$1 million. During the 2000s, this figure dramatically rose to US$12 billion. Today, there are more than 36,000 foreign companies operating in Turkey and their number is rapidly growing every day. info@invest.gov.tr www.invest.gov.tr

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By Dave Baxter

S THE PARTY over for the BRIC economies? After years of hype, Brazil, Russia and India have enjoyed impressive growth but appear to have lost their shine. China, the world’s second-largest economy, which has at times had growth in the double- digits, is worrying markets as it appears likely to slow down. Over the years, analysts have put their hopes on other groups of promising emerging economies, from t he CI V ETS g roup to t he Next 11. And now Jim O’Neill, the former Goldman Sachs economist who famously coined the term BRIC, is leading the charge for Mexico, Indonesia, Nigeria and Turkey, otherwise known as the MINTs. O’Neill maintains that China is of huge economic significance – he has joked that he should have originally opted for the term “C” rather than “BRIC” – and is not eager to write off the other economic giants he first brought to prominence in 2001. But he believes the MINTs, which he has covered in a recent book as well as a BBC documentary, have a number of reasons for optimism. He notes that they have large, relatively young populations, meaning that they could grow extremely quickly over the coming decades without having to boost their productivity – unlike much of the west, where ageing populations lurk. He also points out that each of the MINT nations enjoys an excellent location for future trade, particularly as new global powers emerge. Mexico is neighbour to two huge markets in the form of the USA and Latin America. Indonesia sits at the heart of Southeast Asia. Nigeria, O’Neill has argued, could benefit hugely from being in Africa if nations there become more stable and eager to trade. And Turkey has the advantage of straddling the border between the east and west. A s O’ Nei l l ac k nowledge s, expectations may be low for these markets. The group has been dogged by problems well known to emerging market investors, from Turkey’s heavyhanded government to corruption in Nigeria. And it is not the first set of emerging markets to be highly praised, only to disappoint investors. But he believes the markets may be pleasantly surprised. O’Neill, who travelled around the countries on research last year, meeting some of

Changing times: how the

are taking over from the

s Mexico is one of four new emerging economies

the business and political elite, has reminisced about the “wow” factor he got from witnessing major projects in Turkey and Nigeria. While O’Neill may not be alone in such optimism, it is yet to be seen if investors are won over, and if the MINTs can overcome people’s reservations over the coming years. Kate Phylaktis, director of the emerging markets group at Cass Business School, argues that while the group has huge potential, much work needs to be done. “There are a lot of young people

wanting to work, which is not the case in some of the other countries,” she says. “That is in their favour, but they have to create the opportunities for these people to work. They need the mobilisation of capital to create these opportunities by attracting foreign investment, because they have poor levels of education and infrastructure.” She argues that attracting foreign investment is currently a difficult task for many of the emerging markets. Earlier this year, the tapering of quantitative easing was followed by capital flight from such investments. This ended with central banks in some countries, including Turkey, having to fight to shore up their currency, as investors moved to perceived safe havens. As tapering continues and the threat of a Chinese slowdown looms, there may be similar crises to come in 2014 and beyond. This could be a challenge to central banks, tasked with defending their currencies. And Phylaktis believes that more developed emerging markets, such as the BRICs, could fare better because of greater experience. “ T he more developed t he

economies, the less affected they will be,” she says. “I think one advantage the BRICs have to the MINTs is their financial markets have a greater depth. “In China, they were able to handle the [currency crisis] situation. Giving the impression you can handle the situation is important, and I don’t think the MINT countries have that.” The MINTs may still lack the prestige of the BRIC group, but their future looks brighter than in the west, where recent years have been spent struggling to shake off the effects of the financial crash. In 2014, the World Bank expects Turkey to grow by 3.5 per cent and Mexico by 3.4 per cent. Indonesia is expected to grow by 5.3 per cent, and Nigeria 6.7 per cent. In the next few years, the World Bank expects MINT growth to plateau or rise only slightly. This is a long way from China’s peak, when it was growing by between 10 and 12 per cent.But the MINTs have natural strengths, and there is plenty of room for reform. While the BRICs are unlikely to go away, Jim O’Neill may have found a new success story.

Growth of alternative investment sparked by upheaval WITH volatility in the money markets, alternative investments to stocks and bonds have the chance to take off. Bitcoin, the controversial digital currency, spiked in value last year as haven investments such as gold looked uncertain. Any further market instability this year could lead to big gains for the digital currency. But

it faces its own issues. Jana, a company that focuses on new technologies in the emerging markets, surveyed 1,800 research panel members in Brazil, India, Indonesia, Kenya, Mexico, Nigeria, the Philippines, South Africa and Vietnam about Bitcoin earlier this year. It found that 48 per cent of panellists in Indonesia were aware of Bitcoin. This was the highest result, with the lowest being 13 per cent among panellists in South Africa. When asked

if they would be comfortable investing in virtual currency, panellists were more positive. In Kenya, where traditional banking infrastructure is thinly spread and mobile payments have been a huge success, 74 per cent of respondents said they would be comfortable doing this.But Bitcoin’s prospects vary from country to country – last year China banned its banks from handling payments involving the currency.

Crisis in Ukraine fuels fallout FROM corrupt governments to outbreaks of violence, political instability lurks for many of the emerging markets. In Ukraine, this has boiled over into a fullblown diplomatic crisis. The economic fallout has been obvious, with the Russian markets taking a bruising. The Russian currency, the rouble, took a tumble as investors moved away from it, forcing the country’s central bank to spend $10 billion to prop it up. Russian companies have also taken a beating in the markets. Gazprom, the Russian gas giant that uses pipelines crossing Ukraine to sell gas to Europe, has been particularly badly hit. A glance at a graph showing Gazprom’s share price tells it all. A month ago, on Monday, February 17, the share price was as high as 151.30 roubles. Just a fortnight later, on March 3, this had bombed to 119.86 roubles. After Gazprom controversially increased the price of gas supplies to Ukraine and demanded payment of around $1.5billion in debt, western nations weighed in with financial backing. The European Union, which pledged to help Ukraine pay off its debt, has said it would be willing to offer $15billion in loans and grants over a series of years in order to restore the country’s weakened economy, provided it can meet certain conditions. After others such as the International Monetary Fund (IMF) and America offered financial support, it looked like Ukraine had a chance of avoiding economic meltdown. But it is important to note that the country’s financial woes did not begin with the protests. A country that enjoyed strong capital inflows in the early 2000s, Ukraine was dealt a blow by the financial crisis as investors fled to safer assets. As recently as October, the World Bank warned that Ukraine would need to make significant reforms to boost its imbalanced economy. Qimiao Fan, World Bank director for Belarus, Moldova and Ukraine, said: “Ukraine will benefit from taking steps to ensure a sustainable macroeconomic framework by lowering its fiscal deficit and adopting a flexible exchange rate policy. In addition, key structural reforms to spur private enterprise and strengthen the energy sector are needed to jumpstart growth.”

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The Big Interview Chuka Umunna

By Dave Baxter

E ARE a stone’s throw from parliament and it’s turning out to be an educational morning. Chuka Umunna is wordily explaining the dos and don’ts of British industrial strategy – from supply chains to the role of financial services – when he tilts his head, pauses and softly asks me: “Remind me what your question was again?” At my bidding, he has spent the last 15 minutes talking almost breathlessly about how to keep British business competitive in a global economy. A cup of tea at my side has barely gone lukewarm and he has already tackled the EU, the MINT economies, the Beijing Olympics and Israel’s start-up scene. It’s getting intense. But I guess Umunna, who became an MP in 2010, is used to speaking at length to strangers on a fistful of topics. As many have noted, he enjoyed a speedy rise into Ed Miliband’s shadow cabinet. After being tipped as a future star of the Labour party and performing well on the treasury select committee, where he took on Bob Diamond, he was made shadow business secretary just 18 months after becoming an MP. Now, he is a key player in outlining Labour’s business approach and a gifted media performer, appearing regularly on Question Time, the Today Programme and countless columns and interview spreads. He does have the charm and energy seen in many top politicians. When I arrive at his Portcullis House office and am offered tea, he perkily asks one of his advisers for a “caffeine injection”. And at one point, as he is reaching the climax of one of his arguments, he apologises for talking too quickly for my pen to keep up. When it comes to making Britain successful in an age of large global powers, Umunna has a vision – though not one lacking a political bite. “A starting point is that we are multidependent, and we can see that play out more and more in the global marketplace,” he begins. “We have led a trade delegation to China and a trade mission to West Africa. We have explored the incredible start-up story that is Israel. “If you look at it politically, I think what distinguishes the SDP in Germany, the new Democrats in the States and Labour here is that we believe that by working in partnership with other countries we can achieve more. “We can be in a world that is open or closed. The closed approach is held by UKIP and the mainstream in the Conservative party, saying we should revert back to the UK model of the 1950s, close down the borders and separate ourselves from our fellow countries. “[UKIP’s deputy leader] Paul Nuttall’s argument is we should pull out of Europe, and my comprehension of the UKIP offer is pull out of Europe, close the borders and solve our economic problems.”

munna believes a British exit from the EU – which could go to a referendum in a few years – would diminish the UK’s standing among emerging markets. “The problem that we have is we have to help empower people to lead a good life and ensure the economy grows,” he says. “Our problem is the economy hasn’t been doing that. We have

We are mu and we ca out more the globa

Above: On the campaign trail for Labour in London; inset far right: Nigeria’s “Nollywood” film industry could be a fertile untapped market for UK firms

Follow Chuka on Twitter @chukaumunna

too many low-skill and low-wage workers. Actually, if you look at our labour market, we don’t have enough middle-class, middle-income jobs. We have to change that. “My argument for those with the closed approach is if we shut down the borders and close down UK plc, that won’t enable us to change the nature of our economy. The way to do that is by growing new sectors for South East Asia and Africa and their middle classes. That’s why trade is so important.” He adds: “Europe, for me and for Labour, is central to our trading policy. People will argue that the EU is old hat and really the action is in

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ulti-dependent an see that play e and more in al marketplace He says: “There’s a perennial debate about whether we should pick winners. I don’t think we should pick winners, but I do think we should pick sectors. “The challenge is how we can further develop those sectors. In the automotive sector, we are very strong and it’s one of the biggest exporting success stories. How can we grow the number of jobs and the industry here? We need to work strategically to think about how we make cars here, but also how we make the parts, too.” And he believes there are a number of emerging markets Britain should target – including Nigeria, home of “Nollywood”. He says: “After Hollywood and Bollywood, Nollywood is the biggest film industry in the world. It’s growing at an incredible rate. The quality of the production is not the best. There’s opportunities for our digital and creative firms for the market.” But Umunna believes there are problems to confront. He frets that SMEs are not aware of the financing options they could use beyond high street banks to fund expansion abroad.

the emerging markets, not just the BRIC economies but the MINTs. “They pose it as a choice between losing opportunities or pursuing opportunities in other markets. I think that’s a complete red herring. “The EU is the key that unlocks the door. One of the things I was struck by in China was people there [on a trade mission he attended] said they couldn’t understand why we would want to let the UK leave.” When it comes to the British economy’s strengths, Umunna names a number of sectors he sees as “winners”, including the car industry, financial services, green technology and the creative industries.

nd while he praises trade missions attended by the Prime Minister and other members of government, he warns these are no “panacea” and says UK Trade and Investment (UKTI) varies in the quality of service it provides from country to country. “I have been in one country and found the UKTI is second to none, and then I will go to another country and the UKTI operation is very lacking, and often this hangs on the ingenuity and initiative of the actual personnel,” he says. “I think UKTI has improved the service and increased the numbers of people and resources they have developed to the emerging markets, so it’s more alert to the opportunities. But I think it’s still a way to go to ensure that some of the people are providing the level of service.” We have rattled through a number of foreign markets when we reach a sticky topic: Labour’s relationship with the UK business community. Plans to reinstate the controversial 50p tax and freeze energy prices have not been welcomed in all quarters of the business world.

And Umunna briefly loses his cool when I mention the Conservative portrayal of such policies as “anti-business”. “The Tories will say that!” he protests. “They are hardly going to be encouraging business people to support the Labour party. I think it’s been a dereliction of duty to do that while companies have been increasing gas and electricity bills. We save the average business £5,000 [with an energy freeze]. “We add to that our commitment to cut business rates for over 1.5 million business premises and our commitment to increase competition in banking where lending to businesses is in five high street banks. “On the 50p tax, the global financial crisis caused economies to fall and debt to increase, which has to be dealt with. “I said we have made some difficult decisions, like capping increases in public sector pay to one per cent. Those are very tough decisions. We don’t think people of the business community can demand that we make fiscally tough decisions and be unaffected from it when we focus on infrastructure and investment.” And he complains that while business people will tell governments to “get out of the way”, they are also quick to make requests for state action. It has been an eventful half hour. After being asked to “wrap up” by an aide I am headed out of the door with the remains of my tea. Umunna is keen to be polite but jumps up out of his chair, ready for his next task. For the shadow business secretary, there is much to do.

EEF calls on government support for UK manufacturing recovery SPEAKING at the World Economic Forum’s Davos meeting earlier this year, David Cameron called on the UK to help “bring more of the benefits of globalisation home”. He claimed jobs that have moved to other parts of the globe were being won back, and called for more of the same as the UK economy starts to recover. “If we make the right decisions, we may also see more of what has been a small but discernible trend where some jobs that were once offshored are coming back from East to West,” he said. The Prime Minister is likely to be happy with a recent report suggesting that the trend is advancing. A survey of 271 companies carried out by manufacturers’ organisation EEF (Engineering Employers’ Federation) in December found that one in six had “reshored” – moving from other markets such as China back to Britain – in the last three years. This compared to one in seven in 2009. The report, Backing Britain – A Manufacturing Base For The Future, also found that one in six respondents was turning to a UK supplier for parts and components. Terry Scuoler (above), chief executive at EEF, said: “The trend may be gradual but it is highly encouraging to see more reshoring continuing. While it will always be two-way traffic, the need to be closer to customers, to have ever greater control of quality and the continued erosion of low labour costs in some competitor countries means that in many cases it makes increasingly sound business sense. “It is now key that government policy supports the most competitive business environment possible, so that we continue to see more high-value innovative manufacturers invest in and sell from the UK.” The report also made demands on government for a commitment to keep UK energy costs low or at the EU average, work on apprentice training reforms and clarity around the future of tax reforms and Britain’s relationship with the EU. In a recent speech, Business Secretary Vince Cable announced that nine UK supply chain projects would receive £129m in an attempt to encourage the trend. He said: “Britain is starting to win back business on the basis of hard-headed decisions based on quality and good performance.”

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Local innovation solving global challenges How street lighting can highlight the opportunities and barriers for SMEs INDUSTRY VIEW

he need for innovative technologies to combat global challenges is well documented, none more so than the need to reduce the carbon consumption of public amenities. Government bodies around the world, both national and regional, have ever-tightening limits on the amount of carbon their services produce. The UK, along with many other countries, agreed to cut carbon emissions by 80 per cent by 2050 creating even more pressure for innovative green technology. If we take the example of street lighting we can highlight the opportunities and barriers to growth that SMEs (small and medium-sized enterprises) face when competing in an international market. Globally lighting accounts for 19 per cent of all energy consumption. Large companies are supplying some solutions, but what about the truly innovative solutions being thought up by SMEs? One such business is Select Innovations, a multi-award winning, small electronics

and software specialist based in Norfolk, whose EnLight lighting technology saves money, carbon and provides a new communications infrastructure. Supporting SMEs through their growth is hugely important, especially when they look to create a product with global reach. Select has benefited from incubation at Hethel Engineering Centre, a dedicated innovation hub in the east of England, as well as a close mentor relationship with ARM Holdings. EnLight offers city authorities a cost-effective alternative by significantly improving the energy efficiency of their current infrastructure while negating the need to wholly replace lampposts, an expensive necessity for LED-based systems. Beyond lighting, EnLight uses a sophisticated, low-power communications network, EnTalk, to allow control and information gathering from each lamppost, creating an open platform that can be engineered to any number of tasks. Delivering wireless internet connections, monitoring pollution and collecting

weather information are all possible. The international demand for innovative public utilities is growing. Select has found a demand for cost-effective solutions in developing economies as well as more intelligent systems in the more developed BRIC and MINT nations. Closer to home, the western economies’ push towards smart cities, the growth of big data as a product, and the ever-present need to reduce carbon output align to give what looks to be perfect market conditions. So, with all these advantages, why do SMEs such as Select struggle? SMEs are known for their ability to be agile, adapting themselves quickly to new challenges which works well in smaller, consumer markets but can prove problematic in an international setting.

SMEs such as Select struggle to find ways to facilitate the rapid growth and scale up in production needed to supply to an international market such as municipal lighting. Educating the customer is key to selling new technologies. SMEs looking to sell products and services to the public sector can find complicated tendering processes and risk-averse cultures slowing progress, all while assuming the customer understands the technology. Therefore SMEs need to work collaboratively with their customers and suppliers in strong, research-focused clusters to punch above their weight, to be globally competitive. 01953 859 104 wtaitt@hethelinnovation.com

How Gibraltar can unlock regulation concerns EU domicile is key to supporting AIFMD regulation INDUSTRY VIEW

une 22, 2014 is the deadline when all nonUCITS funds marketed in the European Union are expected to comply with the Alternative Investment Fund Managers Directive (AIFMD). However, despite being only a few months away, hedge fund administrators are reporting that up to a fifth of fund managers are still not prepared, suggesting that managers are struggling to understand how best to comply with the necessary requirements of AIFMD. Nicola Smith, CEO of Gibraltar-based Helvetic, is surprised that funds, who know that full compliance with AIFMD is unavoidable, aren’t taking more active steps during this final period to achieve compliance. The implementation and the specific requirements of AIFMD have become a longrunning battle, and the hedge funds industry in general has continued to voice its concerns as to the additional requirements and costs associated with fulfilling them. Managers need to consider that substantial delays in the application process are likely to ensue if the relevant arrangements are

not dealt with, which may lead to the application deadline being missed. All non-UCITS funds domiciled in the EU will eventually have to register with a local regulator or regulators and all non-UCITS funds managed by an EU based manager, wherever the fund is domiciled, will also eventually be subject to registration, even if the fund managed is out of scope of AIFMD.

Helvetic’s recommendation would be for managers to contact their service providers and find an affordable solution that is appropriate for their particular situation. By taking prompt action, managers will have a greater understanding of what arrangements need to be made in order to comply, and what support they can expect from their service providers. Once AIFMD is in full force, the choice of whether fund managers manage vehicles domiciled and regulated in an EU location will be important. Historically, Dublin and Luxembourg have been preferred jurisdictions for funds – however, in recent years, limited capacity and cost issues in these centres have allowed territories such as Gibraltar to develop as a viable alternative. Gibraltar offers a number of incentives as a jurisdiction, including access to a highly skilled workforce, a supportive infrastructure of ancillary services and lower business costs, which all point to Gibraltar being an ideal location for access to the EU with an attractive fiscal environment. The fact that Gibraltar is part of the EU and fully compliant with AIFMD is a major benefit for those seeking to redomicile a fund. Gibraltar’s fund regime is based on UK common law, domestic legislation and EU directives. It is these principles which, Helvetic believes, puts Gibraltar in its current position of rapid growth, and its dedication to implementation and preparing for regulations such as AIFMD has put Helvetic in an excellent position. +350 2004 5953 www.helveticfund.com

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Inspector Dogberry Dogberry loves the internet. Whether talking to his loyal Twitter following or keeping up with the latest news, the Inspector is rarely offline. The web can also be of huge economic importance, which means that parts of the world without the essential infrastructure could be at a

disadvantage. So how can this be fixed? Dogberry is delighted to hear the rumours that Facebook is thinking of buying a company called Titan Aerospace, with the aim of using its high-flying drones to provide web access in unconnected areas of the world. If the plan, set to start in parts of Africa, goes ahead, it would please the Facebook-backed internet.org project, which claims five billion people are still offline around the world.

Do emerging markets have a conscience about the environment? Bhutan, a landlocked, high-growth nation to the east of the Himalayas, seems to think so. It has tasked Nissan, the Japanese carmaker, with supplying hundreds of its electric Leaf cars, as well as building a network of electric chargers. The country, which is largely Buddhist, is known for focusing on issues such as national happiness rather than just economic growth, and wants to become a zero-emissions pioneer. This isn’t to say it has no economic success stories. The World Bank expects Bhutan’s economy to grow by 8.1 per cent in 2014. Investors may be pre-occupied by the BRICs and MINTs – but there is plenty of action elsewhere. Twitter: @dogberryTweets

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But it would not be the first project of its kind. Just last year, Google announced its “project loon” plans for “a network of balloons traveling on the edge of space, designed to connect people in remote areas, help fill coverage gaps, and bring people back online after disasters.” The Inspector is all for this. As Internet.org argues: “By increasing access to information the internet can increase productivity and enable markets to functions more efficiently.” It also means Dogberry will never be without Twitter updates.

South Africa is set to take fledgling steps into the world of Islamic finance, with plans to introduce its debut international sukuk in 2014. Sukuk, the Islamic equivalent of bonds, adheres to Islamic laws which prohibit the charging of interest. The move marks South Africa’s plans to diversify its debt portfolio and reduce risks. It could also be very lucrative. Islamic finance is a growing sector, and opening itself up to this could bring an influx of business. But this could pull South Africa into a battle for supremacy – cities such as Dubai, London and Hong Kong are already fighting to become the world’s Islamic finance centre. And whoever comes out on top could be a step ahead in the global economy.

Rising stock for Premier Despite promising signs of recovery in the UK and European economies, companies looking for growth will most likely be tempted to look abroad. So it’s promising to see that Premier Foods, the owner of brands such as Bisto and OXO, has already decided to branch out – by selling rice pudding to China. The company signed a ten-year deal with Swires Food Holdings in autumn to distribute Ambrosia rice pudding in China. It is understood that this agreement could possibly extend to other brands in the Premier Foods

portfolio in the future. As firms gain in confidence and look to shake off the effects of the financial crisis, Premier Foods could be a good role model. And what else could this mean for global cuisine? Cup a Soup in Shanghai, perhaps?

By Matt Smith, web editor

u Editor’s pick Emerging Markets Insights http://blog.frontierstrategygroup. com The Frontier Strategy Group’s Emerging Markets Insights blog offers articles on ongoing events and the effects they have on businesses across the globe. Some of the site’s most recent posts focus on the situation in Ukraine and how it affects companies operating in Europe. Check back for regular, interesting updates.

Emerging Markets Daily

iMFdirect

http://blogs.barrons.com/ emergingmarketsdaily

http://blog-imfdirect.imf.org/ category/emerging-markets

Emerging Markets Daily brings you regular posts on the emerging economies from a range of experts. Focusing on nations from Russia and China to Saudi Arabia and the United Arab Emirates, the blog offers in-depth analysis of statistics and thoughts on growth and potential business opportunities.

The International Monetary Fund’s blog has an Emerging Markets section with frequent posts from economics experts available in a range of languages. Recent articles have included analysis of Portugal’s progress and a look at the prospects for Latin America and the Caribbean in 2014.

Emerging Money http://emergingmoney.com

Currency Exchange Rates (FREE – Android) Keep up with emerging economies’ currencies with this app, which incorporates news, real-time charts, and a converter.

WWW.HITA.HU

TwitBird (FREE – iOS) This alternative Twitter app, includes functions that aren’t in the official offering, and has proven popular among iPhone and iPad users.

The Emerging Money blog brings you the latest news relating to investments in emerging markets, with views from world leaders and industry experts alongside opinions from the site’s own authors. Visit for a clean, clearly laid-out website with a solid archive of articles to explore.

Business Reporter · March 2014

Emerging markets

Vietnam

US fast-food giant McDonald’s has opened its first restaurant in communist-controlled Vietnam. The restaurant, which opened last month, is based in the southern city of Ho Chi Minh. Despite a recent slowdown in the Vietnamese economy, McDonald’s will hope to capitalise on a growing appetite for western brands. Names such as Burger King, KFC, Starbucks and Subway already have a presence in the country.

United Kingdom

Investors are turning away from the emerging markets in favour of the UK and other developed markets, according to research. An annual survey of investors for the Association of Investment Companies (AIC) has found that some 35 per cent of investors favour the UK, compared with 15 per cent in 2013. Emerging markets are only favoured by 9 per cent of investors, compared with 23 per cent last year.

NATURALLY

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its first branch in Baghdad last year and is now developing its presence in areas such as Kurdistan. While parts of Iraq are still troubled by violence, the bank hopes to attract business as investors enter the market and others look to finance new projects.

India

Mumbai is the world’s least expensive city, according to research by the Economist Intelligence Unit (EIU). The 131-city Worldwide Cost of Living survey, carried out twice a year, compares prices for products and services including food, rent, utility bills and recreation. The EIU puts Mumbai’s ranking down to low wages and household spending, as well as a “cheap and plentiful supply of goods into cities”. It lists Singapore as the world’s most expensive city.

DISASTROUS

Iraq

UK bank Standard Chartered is busy expanding in Iraq as the country experiences a surge of oil-fuelled growth. Standard Chartered opened

ExpertInsight

Dave Baxter reports on how the weather is now a top consideration in predicting civil and financial upheaval

XTREME weather events and water crises are two of the top threats facing the world this year, according to the World Economic Forum (WEF). In its annual Global Risks Report, the organisation argues that financial meltdowns in key economies are the top danger for 2014, but also warns of food crises, income disparity and political instability. It argues that droughts and floods can have a huge social and economic impact, as they have done in a number of emerging markets as well as when the Fukushima tsunami wreaked havoc in Japan. The report reads: “In 2010, floods in Pakistan paralysed large parts of the country for many weeks, killing thousands of people and wrecking the rural economy.

New rivals a concern for LatAm outlook A nationalist approach to investment capital is increasingly anathema INDUSTRY VIEW

or the world’s leading private equity houses, the ability to raise and deploy capital efficiently around the world is paramount. Where transactions and investments involve emerging markets, structures from international financial centres (IFCs) such as the Cayman Islands provide access for global capital to local business and also provide local investors with access to the global marketplace. It is well established that IFCs such as Cayman have helped enhance growth and prosperity in the developing world. The dramatic declines of poverty in places like China and India are testament to this. A study by Professor Jason Sharman of Griffith University in Brisbane, Australia, found that IFCs help domestic and foreign investors in developing countries access the kind of efficient institutions necessary to drive growth but which are often unavailable locally. The presence of IFCs in the global economy both encourage and fan the flames of growth in emerging markets.

In contrast to China, however, the relative lack of openness to foreign investment structures in Brazil and other parts of Latin America has reduced the effectiveness of the international capital invested. This is a crucial issue for Brazil, which just a few years ago was poised to boom. What once looked like infinite potential for growth now looks like stagnation: margins are being squeezed alongside increased pressure from financial markets and the local currency. Investors looking for aggressive returns are returning to traditional geographical markets which have made a comeback, and competition for higher-risk capital is clearly more intense than ever before. In identifying emerging markets, it’s no longer quite as simple as pointing to the BRICs. The emerging markets of 2014 are diverse in terms of sectors and geography and there is a wider range of jurisdictions competing for investment. For natural resources there are Mongolia and west Africa, South Korea for electronics and Africa for telecoms. Depending on the sector, there are emerging markets in North America and Europe. As formerly favoured emerging economies begin to normalise, we also

have the new breed of developing markets moving into the spotlight which appear attractive to international investors in terms of the right balance of high risk and high reward, such as Mongolia and Indonesia. In an increasingly global economy, the need to put capital to work in an efficient manner has never been more critical. Against this backdrop of globalisation on such a grand scale it is not unusual to find Scandinavian and Chinese investors partnering in a US start up, or a Brazilian joint venture investing in African farming. The flexibility of Cayman Islands corporate entities provides the ability to structure and manage companies with numerous investors and multiple layers of debt and

equity effectively, which is critical to the success of complex cross border transactions. A nationalist approach to investment capital is increasingly anathema in a global marketplace. Encouraging growth needs a global perspective, and jurisdictions such as the Cayman Islands exist to facilitate the raising and deployment of international investment capital in a responsible and transparent manner. Rolf Lindsay (inset) is a partner in Walkers’ Global Investment Funds Group, based in the Cayman Islands +1 345 914 6307 rolf.lindsay@walkersglobal.com

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Flooding in Pakistan, 2010

Tsunami aftermath in Japan, 2011

ExpertInsight

“Thailand’s slow-onset flood in 2011 caused fewer deaths but showed how one local event could have an impact across the world: global car production slowed as supplies of components were cut, and hard drive manufacture for the world’s computers was slashed.

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“Similarly, Japan’s GDP and global industrial production dipped significantly following the tsunami of March 2011.” The piece notes that a lack of water can have a huge impact, both financially and socially. It reads: “Drought in Russia in 2010 led to restrictions on agricultural exports, causing the price of staple grains to rise across North Africa and the Middle East. The resulting food shortages and price rises aggravated the tensions that led to the Arab Spring.” As populations grow and nations ramp up their economic activity, WEF believes the amount of water countries need in order to function will increase. And it warns that other problems, from changing climates to the risk of pollution in places such as China, pose a threat in future. The report reads: “Because of the systemic importance of water for global economic activity, any failings in its planning, management, and use in one country can ripple across the world. “That management is becoming increasingly complex as populations expand and people grow wealthier, demanding more fresh water to supply

cities and factories and consuming more foods, such as dairy and meat, that need more water to produce. Water is equally key for energy production. “While there is growing concern about future climate change exacerbating water-related risk, many countries cannot even manage today’s climate variability. Drought and flood could increasingly ravage the economies of poorer countries, locking them more deeply into cycles of poverty.” Political and social instability could also lead to big problems in the emerging markets. On the BRIC economies, the WEF report warns: “Existing undertones of social unrest may be aggravated by externally driven economic shocks and the unsatisfactory implementation of far-reaching domestic reforms, even more so where political succession planning is unclear. “Popular discontent with the status quo is already apparent among rising middle classes, digitally connected youth populations and marginalised groups. Collectively, they want better services (such as healthcare), infrastructure, employment and working conditions. They also want greater

accountability of public officials, better protected civil liberties and more equitable judicial systems. The misuse of power, official complacency and greater public awareness of widespread corruption have sharpened popular complaints.” But these are risks that apply beyond the BRICs. In its 2014 Political Risk Atlas report, insurer Maplecroft notes that countries including Uzbekistan, China, Saudi Arabia, Turkmenistan, Belarus, Cuba and Vietnam face the greatest potential for social unrest because of the “disparity between political freedoms and social gains”. It reads: “Whether the potential for societally induced regime change or instability is realised depends largely on the entrenched power of government; its willingness and ability to use force; and the extent and speed of policy reform. “The speed of policy reform in China is likely to be sufficient to limit the chances of widespread societal unrest. In contrast, Vietnam has responded to growing opposition by cracking down on social media and freedom of speech, moves that may undermine long-term regime stability.”

Rioting in Cairo, 2011

India: jewel in the crown or a rough diamond? INDUSTRY VIEW

he lure of a market of 1.3 billion people, a growing middle class and a largely English-speaking business community is appealing to British firms. Under David Cameron’s leadership, British trade delegations have flown in and out of India more than ever, the government banging an “export to emerging markets” drum. But does the world’s greatest democracy live up to the hype? What chances do British companies have of succeeding in India when giants such as Vodafone and Tesco are beset with challenges? To an outsider, India appears to be a complicated market. The World Bank’s latest Ease of Doing Business survey ranks India at a lowly 134th of 189 countries, behind Yemen (133rd), China (96th) and Kazakhstan (50th). So just why is it so difficult and where do British companies go wrong? Having supported more than 200 international organisations in India, I have seen the following key mistakes.

Build the right cost base Companies entering India take great comfort in the fact that core costs such

as salaries and commercial property are lower (often considerably) than they are in the UK. After a few of years of trading in India, these companies are still not making any profit. At the outset, companies often do not pay close attention to the local cost base they are building. After running a series of salary benchmarking and other comparative cost exercises versus their nearest local competitors, we usually identify that their cost base is 40-50 per cent higher than their indigenous competitors. When you factor in the additional associated costs of a UK head office and perhaps some expat staff, it becomes difficult to make the bottom line stack up, even if the top line looks good. Build a cost base from day one that is in line with local competitors and maintain this if you want to stay profitable.

Hire the right staff Companies often appoint senior staff based on being comfortable with their international exposure or slick presentability internally to the UK headoffice. These skills do not reflect the ability to do the job they are hired for. Companies need to appoint staff who understand local needs (pricing and product/service localisation) and can actually convert a sale.

Outsource the complexity When an Indian company is required to sign 17 different forms to make a single international payment, you begin to understand the complexity of doing business in India (134th of 189, remember). In the UK a company would never hire a salesman to manage his local tax, banking and compliance affairs. So don’t do it in India! Appoint local experts who will proactively take care of your administrative needs (financial and HR) so that your key local staff can focus on their business development and delivery roles. There are many other important elements to a successful market-entry

strategy, but think local. If establishing a business in India, remember you are competing with local businesses. The population will only increase, consumer demand is in its infancy in India and the economy is growing. Build your presence accordingly and success will follow. Adrian Mutton is the founder and chief executive of Sannam S4, a market-entry specialist providing practical assistance to British businesses entering the Indian market 020 3303 0025 adrian.mutton@sannams4.com

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For investors, Turkey is the right time at the right place Many global companies have either established their manufacturing bases in Turkey or moved their regional headquarters to the country INDUSTRY VIEW

urkey, one of the most vibrant economies in the world, has been undergoing a profound transformation thanks to the structural reforms engaged and accelerated by Turkey’s EU accession negotiations started in 2005. The Turkish government, which considers foreign direct investment (FDI) as the main component of its economic development, has significantly improved its investment environment through various reforms and new legislations. In 2003, an FDI Law, offering foreign investors legal guarantees by treating them equally with local investors, was enacted. Economic performance, a young and dynamic population, strategic location, as well as an investor-friendly environment have all together created plenty of investment opportunities in Turkey and made it one of the most attractive destinations for investment. The country has a tradition of parliament for more than a century and it is governed democratically. In addition, it has one of the most liberal investment environments in the world. A customs union between Turkey and the EU countries has been in force since 1996. In addition, we have free trade agreements with 23 countries, most of which have are with the surrounding countries. Free trade agreements with 25 countries including the US, Japan, Canada, India, Malaysia and Indonesia are either in an official negotiation process or pending for official negotiations. Current free trade agreements and the customs union enable investors to access multiple markets with U$20trillion GDP, 780 million people and US$3.5trillion imports. That is to say, investors can easily export their products to different destinations from Turkey. So it would not mean only investing in Turkey, but also in the whole region. That is why many global companies have either established their manufacturing bases in Turkey or moved their regional headquarters to Turkey. It is a well-known fact that the skilled labour force in Turkey is available at very competitive costs compared with the rest of the world. While labour costs in Turkey are considerably lower than in rival countries, the growth rate in labour productivity has

been impressively higher in recent years. Lower labour costs and lower average wages, together with increasing labour productivity, are creating highly profitable opportunities for investors. Furthermore, half of Turkey’s population is under the age of 30. Every year, more than 600,000 students graduate from Turkish universities. Today, Turkey is training world-class engineers in many areas

ranging from mechanical engineers to computer engineers. Turkey’s motto for investors is “Turkey: right time, right place”. This is a great time in Turkey’s history. As a booming country with a GDP growing at an average annual rate of more than 5 per cent for ten years, Turkey represents tremendous potential with ample investment opportunities for global investors. Experts agree that this

trend will continue into the future as the country vigorously pursues its goal of becoming one of the top ten economies in the world over the next ten years. Many global investors have taken their part in the fertile investment environment of Turkey and they are now growing with Turkey. info@invest.gov.tr www.invest.gov.tr